Monthly Archives: July 2017

Nigeria: Economy is slowly but surely recovering

By Rafiq Raji, PhD

My forecasts suppose the economy could record positive growth in Q3-2017 but almost certainly in Q4. There are those who are more optimistic, however, supposing that this could be as early as Q2. After my earlier optimism about a recession exit as early as Q1, I am taking a much more cautious view this time around. My revised forecasts take into consideration the historical trendline growth of the economy during its good and bad times. The midline scenario puts the economy on a positive growth trajectory only as early as Q3. If this happens earlier, I would be pleasantly surprised. But of course, even as the economy would likely exit recession this year, technically, that is, the positive effects on peoples’ wallets would probably take longer to manifest. When businessess start investing again, they typically make new hires which then translate into greater consumption and so on. They already are: recent business expectations (-1.5 in Q2 from -27.7 in Q1) and purchasing managers’ index (52.9 in June from 52.5 in May) data published by the CBN point to a recovery.

FX liberalization is only immunization against crude oil price volatility
Central bank governor Godwin Emefiele has been receiving plaudits lately. With the exchange rate stabilizing, some of his fervent critics have been on the record wondering if he were not right with his unorthodox policies after all. I do not share this view. Had crude oil prices remained tepid – and they largely still are, the Central Bank of Nigeria (CBN) would not have had the confidence to allow for a separate so-called investors’ and exporters’ (I&E) FX window. Besides, the increased FX trades, about $4.2 billion thus far, recorded via the window is a vindication of earlier views that a fully liberalized market would not only give foreign portfolio investors confidence in the market but also relieve the CBN’s foreign exchange reserves. Bear in mind that a sustained bullish trend in the crude oil markets remains doubtful. In addition to Nigeria and Libya, which are exempt from OPEC production cuts, increasing their output more than envisaged, other members of the cartel, Saudi Arabia for instance, have also recorded above-target production. So the increased FX trades in the I&E window are not so much about portfolio managers counting on oil prices to rise as they are hoping the CBN would keep its word this time about ensuring investors would be able to bring and exit their funds at will. At a market-determined rate.

Rate cut would not be data-dependent
In light of the recent rate cut surprise by the South African central bank, some economists are already hedging their bets about the CBN’s July monetary policy meeting. They now wonder if the CBN might not similarly succumb to political pressure to cut rates. Unlike in the South African case, however, a CBN rate cut would not be data-dependent. Yes, annual consumer inflation has been slowing, lately to 16.1 percent in June from 16.3 percent in May. Were base effects not a significant factor, the downward trend may not have been so smooth. This is because month-on-month inflation has not been similarly sober, averaging at 1.5 percent since the beginning of the year. That said, there are some economists who have long held the view that monetary policy easing would be required to lift the economy out of the doldrums.

But why is inflation still so high? Food inflation is a dominant reason why. And it is not entirely a hard currency story, albeit that continues to be a significant factor. The 2016 cereal harvest, which was completed in January 2017, was above-average, up 5 percent to 22.6 million tonnes. So, supply is not short. Farmers are increasingly finding it more lucrative to export their produce, however, even for crops which are yet not in ample supply. Take the recently launched yam exports initiative of the government, for instance, even though there is currently a 20 million metric tonne supply-demand gap. Prices would almost certainly rise consequently. Never mind that the same mistake being made with crude oil and the other primary goods is being made here. What the authorities should desire to export should not be raw yam tubers but processed yam products. We should earn more of the value here instead of subsidizing it for another market only to import the more expensive processed good afterwards. Food prices have also remained high because of our exploitative business culture: a price increase is usually sustained artificially longer than necessary. That is, when market conditions change, traders are not similarly swift in reducing prices.

Truth is, if the CBN desires that inflation remain sustainably on a downward trend, it must resist the temptation to cut rates just yet. Easier policy by the CBN would not only accelerate inflation, it may just like before not translate into lower commercial bank loan rates. The CBN is probably mindful of the recent outreach by the Nigerian Senate over high interest rates. In a rebuttal, the argument was made about how perhaps the first point of call should be government securities, which but for that with a 3-month tenor, currently yield on average at least the inflation rate. The authorities are not being generous for the sake of it. They have no choice. It is the barest minimum they must pay to compensate for price risk. And the fiscal authorities need the money. Commercial bank loans which must compensate additionally for default and tenor risk must be priced higher. Banks also have to add some of the unique costs they bear due to the difficult operating conditions in the country, where they pay for myriad things that ordinarily should be provided by the government. Power supply, for instance. A rate cut would be ineffective at this time.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/nigeria-economy-slowly-surely-recovering/

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A critique of Mandela’s legacy

By Rafiq Raji, PhD

Whether in mining or banking, the structure of the South African economy still bears great resemblance to that of the apartheid era. Mostly black miners take trips deep down into the earth via thin shafts, while their mostly white counterparts stay atop or wear clean shirts to offices on well-manicured grounds with vistas still as beautiful as they were when they first fell in love with the country. If the new mining law, now suspended, asks that blacks own in perpetuity, a 30 percent stake in all mines, is that so unreasonable? Maybe the minimum 1 percent of turnover compulsory distribution to host communities requires a rethink; using another variable, like profit, could be problematic, however; because it could be manipulated. It could be made due only after unavoidable business expenses, though. Asking that half of new prospecting rights be black-owned is not unjustifiable either. In any case, what is the alternative? If the status quo is allowed to continue, a more radical approach would be adopted further down the line. The ultra-nationalist Economic Freedom Fighters (EFF) opposition party would nationalise all mines (and banks) if it ever got to power certainly. Of course, the mining companies may not mind buying more time to sweat their assets faster under the current lopsided terms: only about 38 years in gold reserves are believed to be left, albeit there is at least two centuries worth of platinum reserves yet untouched. So on balance, there is much to be gained and lost by both sides.

Best to concede a little more now
Even so, it is probably wiser for the industry not to allow things deteriorate to that extent. So even as their resort to the courts have secured them a quick-win, with mines minister Mosebenzi Zwane suspending the implementation of the new law pending when the courts decide on the matter, they would be better served by making some concessions to the government. It is unfortunate, of course, that someone with President Jacob Zuma’s tainted credibility happens to be the one championing the black cause. Like Zimbabwe’s Robert Mugabe before him, his selfish motive is writ large. Had that person been Nelson Mandela, no one would have the temerity to challenge such a move. Such was President Mandela’s stature and power. With lesser beings now floudering at the helm, many argue Mr Mandela could have done much more. Because now a black South African with that kind of influence is not likely to emerge again in our lifetime. (Just like India is not likely to produce another Mahatma Gandhi.) The conditions that create such mythical figures only occur generations at a time. And rarely is a later champion ever able to fill in the shoes of earlier heroes. So with the benefit of hindsight, Mr Mandela should have paid as much attention to economic freedom as he did the political one. Some might say he was constrained somewhat. This is doubtful. The apartheid regime only caved in because it had no choice. Mr Mandela could have pushed harder.

So as the world marks another Mandela Day (18 July), black South Africans must reflect on the future they want for their country. Their reality is what it is. But if they think deeply, they would see how fortunate they already are. White South Africans can be accommodated, allowed to continue thriving in tandem with a similarly successful black population. The key is to find that optimal policy mix that allows both sides get almost all they want without totally alienating the other. Securing more economic power for blacks does not necessarily have to be an entirely zero-sum game. Without some forceful correction of the country’s currently unjust economic structure, however, whatever progress that is made while it subsists would eventually unravel, when an even more impoverished black majority decides they have had enough. Still, no matter how much economic power black South Africans snatch from their erstwhile oppressors, it would be meaningless if most remain underskilled or as is depressingly still the case for a lot, unskilled. Europeans realised a long time ago that it would be far more profitable to give control of primary resources to their former colonies if they could almost exclusively be the ones to add more value to them and subsequently sell them back at premia that dwarfed whatever value the raw materials ever had. So when it seemed like the colonialists had finally accepted reason by succumbing to agitations for independence those long years ago, they were actually motivated by the realisation that what would replace their repression could be even more lucrative. And without any of the bad press.

Not too late
But this is no secret, or excuse in fact: Asians managed to unshackle themselves regardless, rising to levels that African countries they were hitherto at or below par with now only dream of. Without a doubt, African leaders, past and present, are especially guilty for their countries’ frustratingly floundering evolution. For sure, there were foreign enablers. But principally, Africans are primarily responsible for the story state of their affairs. It would be most saddening if all the suffering that Mr Mandela and his people endured for all those long years turns out to be all for nothing. But that is what it would be if all that the black majority achieves is the expropriation of brick and mortar from their erstwhile oppressors without the skills to maintain and enhance them, and innovate new ones. Zimbabwe is the perfect example of how a senseless economic nationalism is almost a sure step to even more bondage. While that country continues to struggle since the selfishly motivated act by Mr Mugabe, the expelled whites have since found fortune elsewhere. A subsequent reversal by Mr Mugabe after much loss is evidence of the error. To that extent, Mr Mandela had some foresight in making what now seem to be overly generous concessions to the apartheid government. His pragmatism was suitable for his time. A new one is required today.

Also published in my Premium Times Nigeria column (19 Jul 2017). See link viz. http://opinion.premiumtimesng.com/2017/07/19/the-mandela-legacy-the-costs-of-not-pushing-hard-on-economic-freedom-by-rafiq-raji/

South Africa: Economic outlook still calls for caution

By Rafiq Raji, PhD

Even though the South African economy probably exited recession in the second quarter of the year, the outlook remains mixed. My current forecasts suppose growth was 1.2 percent in Q2-2017, after contractions of 0.7 percent and 0.3 percent in the preceding two quarters respectively. Business confidence recovered in June, with the index up to 94.9 from 93.2 a month earlier, a seven-month low then. And yes, annual consumer inflation continues to decelerate, coming out at 5.4 percent in May from 6.6 percent five months earlier, and would probably slow further in June to 5.2 percent, say. It could be about 5 percent or less by year-end, within the central bank’s 3-6 percent target inflation band.

But the most recent consumer confidence reading was poor. It deteriorated further in the second quarter of 2017 to -9 from -5 in the preceding three months, as consumers remain weighed down by a sluggish and dysfunctional labour market, high taxes and still dear but decreasing food prices. The most recent Purchasing Managers’ Index (PMI) data, a bellwether of the economy, was not encouraging either. That compiled by Markit fell to 49.0 in June, a 14-month low, from 50.2 the month earlier. Unsurprisingly, the IMF continues to warn about the economy’s vulnerabilities to external shocks and funding shortfalls, as recently as early July, even as it remains steadfast on its 1 percent growth projection for the economy this year. (Mine is 0.5 percent.) A subsisting toxic political environment would continue to be detrimental to business and consumer confidence, it adds.

It is heartening, of course, that finance minister Malusi Gigaba has a plan to supposedly steer the economy out of its current recession, unveiled in the week just past. More store would be put in how much will there is to implement it and how transparently so than its content, though. The tone of the plan certainly echoes the radical economic transformation drift of the ruling African National Congress (ANC) party. Some state enterprises would be partially privatised, non-core state assets would be sold, and so on. A sustainable wage agreement by February 2018, two months after the ANC elective conference, is probably going to be a tall order, though. The proposed financial sector, tax and procurement reforms are within Mr Gigaba’s powers at least. So these should be relatively easy. State-owned enterprises’ reforms may not be quite so.

Not yet
Arguably, the economy could use some reprieve from the monetary authorities. Thankfully, there is some room for the South African Reserve Bank (SARB) to begin to cut rates before year-end, which could be as early as this quarter, by 25 basis points to 6.75 percent, say. Another 25 basis point cut to 6.5 percent in Q4-2017 would also not be farfetched. A rate cut would probably be unwise at the July monetary policy committee (MPC) meeting, however, especially as the SARB fervently tries to fend off imminent political interference from stakeholders who see policy easing as the only way out of the doldrums for the South African economy. Not only must the SARB seem to remain stubbornly on its inflation-targeting path, the toxic politics that has forced it into war-mode also inevitably imperil any potential dovish policy action: it has to avoid even the slightest perception that it is susceptible to pressure. Still, the assault on the SARB is real. It is much heartening that Governor Lesetja Kganyago has shown an almost fanatical zeal to protect the mandate and independence of the bank.

We the people or we the few
Of course, there would be worries about whether Mr Gigaba’s plan is not just another opportunity for corruption and other unseemly acts that have come to be associated with the Jacob Zuma government. All these are amid still ongoing controversy over the increasingly rampant use of state institutions to achieve what are clearly selfish political objectives. Some argue the major problem is not the ANC per se, but President Zuma. One analyst estimated cheekily recently that his poor stewardship might have cost the South African economy about 1 trillion rand, a quarter of 2016 output. In frustration, or perhaps sensing an opportunity, the South African Communist Party (SACP), one of the three-member ANC-led governing tripartite alliance, recently declared it would contest the 2019 elections independently, whilst still maintaining a foothold in the ruling government. Of course, hedging as such is as much due to the SACP’s disillusionment with Mr Zuma as well as its feeble conviction in its electoral prospects. Had the older SACP taken on the mantle now ably assumed by the young ultra-nationalist Economic Freedom Fighters (EFF) opposition party much earlier, the story could have been a little different. The economy’s prospects could be so much brighter without Mr Zuma.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/south-africa-economic-outlook-still-calls-caution/

G20 v Africa: Still same old tokenism

By Rafiq Raji, PhD

Evidence that America’s stature has diminished under the leadership of the erratic incumbent, Donald Trump, was writ large at this year’s heads of state meeting of the group of 20 major world economies (G20) in Hamburg, Germany. (Together, they constitute more than 80 percent of global economic output.) Mr Trump was a sorry sight to say the least, isolated consipicously from other leaders, with less seeming ones like Russia’s for instance, far more at ease. Even as world leaders are beginning to learn how to work around or without Mr Trump, America’s divergence from the other 19 members (and indeed the world) on hard-fought global consensus on trade and climate change is going to cost everyone. In contrast, Mr Trump very happily obliged four African countries US$639 million in food and other humanitarian assistance. Almost 20 percent of the funds would go to Nigeria to deal with the desperate situation in the northeast. When summed with earlier declared aid, the total American pledged assistance for Africa in the 2017 fiscal year comes to about US$1.8 billion. When proposed Trump aid cuts to United Nations’ African peacekeeping operations and the United Nations Population Fund (UNPF), a major funder of crucial family planning programmes on the continent, and the closure of some African-focused government agencies (like the US African Development Foundation), and so on, are considered, the announced American aid at the G20 summit rings hollow somewhat. The South African president, Jacob Zuma, whose country is the only African member of the G20, shed more light on the African gains from the summit. They were mostly related to aiding youth and women development. One initiative aims to create 1.1 million new jobs by 2022, with a skills programme for more than 5 million youths over the period. Another would finance women entrepreneurs and boost the technological savvy of girls. With one-third of Africa’s 420 million youths unemployed and another third in vulnerable employment, these initiatives would barely scratch the surface of the problem. Agriculture and labour-intensive manufacturing remain the most viable way to create jobs. Africa’s richest man, Aliko Dangote, already recognises the urgency and opportunity, and has announced plans to invest US$4.6 billion in the Nigerian Agricultural setor. The level of his commitment is a good way to assess the relative pittance of such nonsensical assistance like the announced American one. Quite frankly, until the world’s advanced economies genuinely desire that African countries succeed, their initiatives would continue to fall short.

Self-interested intentions
Still, much credit must be given to the German presidency of the G20 this year, which tried against daunting odds to focus on African issues. Considering myriad tensions among members over more pressing issues, German Chancellor Angela Merkel must be applauded that Africa managed to feature as prominently as it did. Unfortunately, it did not seem like her colleagues, Mr Trump for instance, shared her vision that what Africa needs is not more aid but partnerships. Of course, the symbolism of German city, Berlin, being were the fabled “scramble for Africa” was decided adds a tinge of irony to her advocacy. With illegal African immigration to Europe continuing unabated, there is a recognition that should Europe and other developed economies not do their utmost to make living in Africa more palatable for the continent’s youths, there is not much that can be done to stem the tide. It makes sense then that the focus of the G20 German presidency’s African initiatives were on youth and women. Simpler but more far-reaching moves could have been made, however. The advocacy made by Nigeria’s acting president, Yemi Osinbajo, ahead of the summit, did not receive the much deserved attention, for instance. Prof Osinbajo thought to reiterate how often these summits end with nice pledges for African countries but hardly translate into concrete action. Aptly titled “It’s time to move beyond pledges to back Africa’s future”, Prof Osinbajo was primarily interested in what the G20 would do to ensure information about beneficial owners of secretive companies and trusts used to hide illicit wealth is made public. Corruption investigations by African governments on the trail of treasury looters who have stashed their ill-gotten wealth in Europe and elsewhere would continue to prove difficult otherwise. Of course, it is probably foolhardy to expect these advanced economies would simply block at least US$50 billion in financial inflows, though illicit, from African countries. Fortunately, there is much more African countries can do to recover the significant portion of stolen public funds within their borders.

Holier than thou
In the Nigerian case, for instance, the authorities have recorded greater success in recovering looted funds locally. A whistle-blowing policy, increasinlgy a double-edged sword, also proved to be helpful initially. With whistleblowers now realising that the government’s protective measures for them underwhelm in the face of greater resources in the hands of beneficiaries of corruption, the initial momentum has begun to slow somewhat. If Nigeria, which is in dire need of funds for its ambitious budget this year and later on, hopes to secure greater recoveries in the quickest time and lowest cost possible, there needs to be a wiser approach. Just this week, for instance, finance minister Kemi Adeosun announced the country could not borrow any further this year, asserting that needed funds for the 2017 budget would have to be sourced internally. The recent tax amnesty executive order for those who either are currently not within the tax net or have underreported their assets hitherto, which the government hopes would bring at least US$1 billion in additional revenue, is a little step in this direction. It is highly unlikely, however, that treasury looters that have thus far managed to escape the long hands of the law, would be willing to take the risk of disclosing their ill-gotten wealth. The only way this set of thieves would be willing to confess their sins is if they are assured of amnesty backed by law. So those who have been railing against the proposed economic amnesty bill in the Nigerian lower legislature should think again. Most are hypocrites, anyway, barely cringing when similar initiatives were proposed for people who committed murders and destroyed crucial infrastructure because it bordered on their personal security. If Truth and Reconciliation commissions can be instituted to grant amnesty to people who committed genocide in exchange for their confessions, what is the difficulty in an arrangement that allows us recover our stolen wealth from these shameless thieves in exchange for amnesty from prosecution. If it is made time-bound, and the tax on the declared stolen wealth set very high, 90 percent, say, would it be so bad an outcome? To be effective though, the law should be in tandem with blocking the loopholes that allowed the pilferage to occur in the first place. During the Goodluck Jonathan presidency, central bank governor Sanusi Lamido Sanusi claimed at least US$20 billion had been stolen, a move that cost him his job. Now Emir of Kano, Muhammad Sanusi II has been vindicated. Of course, that was just the hole he could see. Much more was pilfered. But tell me, how much of that has been or would ever be recovered? About half thus far; US$9.1 billion in assets and funds. The United Nations Office on Drugs and Crime (UNODC) estimates Nigeria’s stolen wealth almost forty years since independence to 1999, when the country embarked on its most recent democratic experiment, at about US$600 billion. Another USD$125 billion is believed to have been embezzled since 1999. The sum, US$725 billion, is almost twice of the size of Nigeria’s economy in 2016 of about US$406 billion. There is no way a punitive approach would succeed in recovering even a quarter of that. Unless we start taking pragmatic approaches to solving our problems, we will continue to flounder.

Also published in my Premium Times Nigeria column (13 July 2017). See link viz. http://opinion.premiumtimesng.com/2017/07/13/g20-vs-africa-still-same-old-tokenism-by-rafiq-raji/

So who won at the ANC policy conference?

By Rafiq Raji, PhD

Irregular; that was what I thought of finance minister Malusi Gigaba’s initial reactions in an interview with Reuters to Public Protector (PP) Busisiwe Mkhwebane’s mischievous proposals in June to change the mandate of the South African Reserve Bank (SARB): while defending the SARB’s independence, he was non-committal on whether the Treasury would join in a proposed legal action by the central bank against the PP. I was almost sure his difficulty in being his typical smooth self then was likely because he was privy to what is widely believed to be a grand scheme to make the SARB fall under the influence of his principal, Jacob Zuma, the South African president. My suspicion was confirmed not too long after when his deputy, Sfiso Buthelezi, unabashedly wondered, in a speech delivered in late June at the Gordon Institute of Business Science, a top South African business school, why the SARB should continue to have a 3-6 percent inflation target, set a long time ago when economic conditions were supposedly different. His arguments are nonsensical. Of course, the SARB did a robust rebuttal in its annual report released at about the same time, painstakingly explaining the economic rationale for its policies and how they help achieve precisely the goals its traducers were supposedly aiming for. Governor Lesetja Kganyago has gone even further: he wrote an editorial in a popular weekend newspaper recently, aptly titled: “Let’s base discussion of monetary policy on facts.” Mr Kganyago did not mince words: were the authorities to embark on an expansionary binge, the current recession might actually last for longer and even more painfully so.

Own the darn thing
At the recently concluded 6-day African National Congress (ANC) national policy conference, so-called “radical economic transformers” suggested it was time to nationalise the SARB. For sure, Mr Gigaba and his team at Treasury filed a suit in court challenging the PP’s proposals shortly after the news broke, joining an earlier one by the SARB. It made sense though, doesn’t it? Why bother about the mandate when you could simply own the darn bank. Naturally, a typically hyper South African press (and tireless Zuma critics) was hardpressed to argue against the logic around why the SARB should not continue to be in private hands. Of course, much of the suspicion around even such a common sense move revolves around the embattled Mr Zuma. Otherwise, and like I argued in an earlier column (“Who should decide a central bank’s mandate?”, 27 June 2017), it is an anomaly for the SARB to be privately owned. Most central banks are not. And those that still have private shareholders (like the US Fed) have such advanced and developed financial systems that it does not really matter in whose hands a central bank is in. More importantly, the Bank of England (BoE), which most central banks are modelled after, is publicly owned. And were one to rely on the BoE model even further, it might be pertinent to point out that until May 1997, the Chancellor of the Exchequer (finance minister) was the person who set interest rates, not the central bank governor. (Former prime minister Gordon Brown, who was chancellor at the time, has the unique distinction of transferring these powers to the BoE.) So on the face of it, the ANC is not doing anything untoward. But yes, those who worry that it might only be the beginning of likely increased meddling at the central bank (and other venerated institutions) are justified. To succumb to those fears would be short-sighted, however: Mr Zuma, his ilk and indeed his party would not be in power forever.

I’ve got the power
But Mr Zuma was not finished. He had other rabbits to pull from a hat. To ensure that Nkosazana Dlamini-Zuma, his ex-wife and frontrunner for the ANC presidency in elections scheduled for December, would have a place in government when he leaves office, he “accepted” the proposal of a dual deputy presidency by his home province, KwaZulu-Natal. How will it work? The candidate who loses the fight for the top job would automatically become a first deputy president, senior to the deputy presidential nominee of the successful presidential candidate, who then becomes a second deputy president. Some have interpreted this to mean Mr Zuma is not confident he has the delegates to guarantee victory for his favourite. During his remarks, the horror on the other leading contestant’s (Cyril Ramaphosa, the incumbent South African and ANC deputy president) face was a sight to behold. Of course, the proposals are simply just that: they would be debated at the branches and so on, before final adoption at the elective conference in December. It would probably be just a formality. A majority of the delegates and the bulk of the ANC system remains beholden to Mr Zuma, who though embattled, still retains tremendous powers to dish out patronage and harass erring cadres. That wasn’t all. Land expropriation without compensation was also proposed, with a caveat; only when it is “necessary and unavoidable”. The thorny issue of free higher education was also taken on: it would be free from next year, “subject to availability of funds”, of course. You guessed it. It was almost as if the ANC decided it would simply just do the key things in the ascendant ultra-leftist Economic Freedom Fighters (EFF) opposition party’s manifesto. Probably envisaging these, EFF leader, Julius Malema, has already begun to change tact, casting his net wider than Mr Zuma, who could be gone as early as December. Amidst all these are a very nervous investor community. My best advice to them would be to echo the words of former SARB governor Tito Mboweni two months ago: “It’s going to be dirty! The stakes are high, be careful.”

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/won-anc-policy-conference/

Lesssons from the Etisalat saga

By Rafiq Raji, PhD

It came to light in early March that Emerging Markets Telecommunication Services (“EMTS” or “Etisalat Nigeria”), Nigeria’s fourth largest mobile telecommunication service provider, missed payments on a US$1.2 billion loan it took four years ago from a consortium of thirteen Nigerian banks. It did give notice a month earlier, though. And it had paid back almost half of the prinicipal. What was the purpose of the loan? The refinancing of an existing $650 million facility and the upgrade of its network. Sounds reasonable. But why couldn’t it pay? The firm blamed a weaker naira and shortage of hard currency. It sought to renegotiate the loan, of course; seeking a conversion of part of the foreign currency obligation into naira. Understandably, the banks did not accept the offer: they took loans in hard currency themselves to lend the funds. What the banks wanted instead was for the parent Emirati company to recapitalise its Nigerian subsidiary, in which it had a 45 percent stake. It refused, choosing to divest instead by transferring its shares to the loan trustee. Now equity holders, the banks would also now bear potential liability for the company’s other obligations. In a nutshell, they got a bad deal. With 20 million subscribers (14 percent market share), EMTS is a systemically important firm in Nigeria. The banks could not just strip the firm of its assets, with job losses and industry chaos in tandem. And should its troubles be handled badly, the potential effects on an already unpopular investment destination could be far-reaching. This point must have been why the Emirati parent dug in its heels, especially as they were able to get away with similar stunts in Tanzania and India. Besides, the Nigerian affiliate only accounted for 3.7 percent of its global revenues. Incidentally, it did signal how feeble it deemed its commitment to EMTS: it wrote down the value of Etisalat Nigeria to $50 million in 2016. Was there anything the banks could have done then, though? Not much. Thankfully, a restructuring plan has been agreed, following the intervention of the authorities. A seven-member board comprising four from the banks, two from local stakeholders and one from the banking and telecoms regulators would now run the affairs of the company temporarily. At least, jobs would be saved. Still, we must wonder about what could have been. And how to avoid a recurrence.

Not so Arab money now
Admittedly, we were all a little starry-eyed. Bear in mind, much of the confidence that Nigerians and their banks for that matter reposed in the company was due to the backing of Mubadala Development Company, the main investor in the Emirati mobile operator. Could the lenders have been a little more cynical? Could the loan terms have been more stringent? Was a guarantee sought from Mubadala, especially as the currency mismatch was writ large? (The Nigerian subsidiary was primarily going to service the dollar loan from its naira earnings. Of course, back in 2013, the banks could not have envisaged the naira would take a turn for the worse only 2-3 years later.) To be fair to the banks, there is probably not much they could have done differently. That is, beside not giving the loan in the first place. A banker had to be insane not to lend to Etisalat four years ago, however. Guarantees were indeed sought and received from the Mubadala nominees on the company’s board. But judging from how easily the foreign directors have been able to extricate themselves, they probably reckon it is not water-tight. And take the issue of the clearly rare dollar inflow of more than US$700,000 from the sale of the firm’s towers to IHS that the banks now allege was diverted (by an unnamed Mubadala-nominated finance chief) to fulfil naira obligations instead; in light of the arbitrage opportunity created by the central bank’s restrictive exchange rate policy. How could the inflow have been diverted without the banks’ knowledge, though? Something is amiss somewhere. It is either a failure of structuring or oversight. And therein lies the lessons for local lenders and investors: Do your due-diligence and structure your transactions properly to ensure you do not lose money. Put simply: assume the worst case scenario. Because ordinarily, Etisalat Nigeria remains a going concern. It continues to earn revenue and its network has not suffered major disruptions on the back of its financial troubles.

Strategic firms must be forced to list
Would events have turned out differently if EMTS were listed on the Nigerian Stock Exchange (NSE)? For one, it would have needed to publish its accounts regularly. Alleged financial shenanigans would probably have come to light much earlier. And Mubadala might not so easily just walk away. It could also raise equity capital by issuing additional shares. There could have been more benefit to the economy certainly, from dividend payments and capital gains to its equity investors. Better transparency might have made the public more sympathetic for sure. Public pressure early on could have instigated needed changes in time to forestall a default perhaps. With the company now “spent”, it would probably be a hard sell now. There is also the dimension about what the Nigerian directors of the company were privy to. It is high time they realise their jobs extend beyond attending a few board meetings and rubber-stamping glossy reports by management.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/lesssons-etisalat-saga/